Lord Abbett sees 10 percent equity upside

By Herbert Lash

NEW YORK (Reuters) - Growing investor appetite for risk and recognition that equities are better valued than bonds will kindle another year of double-digit returns for stocks in 2007, the chief investment officer at Lord Abbett & Co. said on Wednesday.

Investors have invested conservatively and rationally in recent years, with no bubble in sight to burst, Bob Morris told the Reuters Investment Outlook 2007 Summit in New York.

The benchmark Standard & Poor's 500 Index .SPX will likely gain 10 percent next year as investors set aside their post-tech meltdown and headline news worries, said Morris, who oversees about $110 billion in assets at Lord Abbett.

The Jersey City, New Jersey, firm last year predicted the S&P 500, which is up 13 percent year-to-date, would gain 15 percent in 2006. Morris said that is still possible.

"We thought the market would end this year with the S&P at 1450. I still think there's a good chance for the rally at the end of the year here to do that," he said. The S&P 500 index closed Wednesday at 1413.21.

If Morris is wrong on his prediction for a 10 percent gain in stocks next year, he said: "I'm going to be biased on the low side, and that's going to be a real shock."

Morris, a 35-year capital markets veteran, said he could build a very strong case, relative to every asset class, that equities is the place to be.

"It's as clear to me as it's been in a very, very long time that equities are really the last opportunity to gain above-average returns," he said.

Profits might surprise on the upside or downside, but Morris said that with corporate profit levels at 40-year highs, he does not expect earnings to be the big story next year.

"The story is in interest rates and which way we resolve that conundrum," he said, referring to the inverted yield curve, with interest rates on long-term bonds lower than on short-term bonds. For many analysts, such an occurrence points to a coming recession.

Morris said he believes the Federal Reserve will leave interest rates alone next year, despite the views of many analysts who see a rate cut in the first half of 2007.

"Everybody now forecasts the market based on inverted yield curve. I think the big surprise for all the market gurus is we're going to walk away from this episode and say the inverted yield curve didn't mean anything," he said.

Investors have acted very rationally in recent years, which leads Morris to believe there won't be panic or the bursting of any build-up in pricings. The constant barrage of alarming news has played on investor psychology, he said.

The rise in property prices is about halfway resolved, and if nothing disastrous happens in real estate in the next six months, it is unlikely to cause any concern, he said.

An unwinding of the war in Iraq, which might have its seeds in the bipartisan Iraq Study Group, would greatly ease investor concerns and lead them to open their wallets, Morris said.

"Every day we're told over and over and over again how Western Civilization as we know it is on the brink of coming unglued," he said. "I think that's had a huge effect on people's psyches."